What Is Underwriting and Why Is It Important?

If you’re like most homebuyers, you’ll need a mortgage loan to pay for your new place.

One of the many terms you’ll probably hear your loan officer use is “underwriting.” You may know exactly what that means, or you might not have any idea.

Today we’ll define underwriting and how it fits into the mortgage lending process so you’ll understand how it applies to your purchasing journey.

What Is Underwriting?

In a nutshell, mortgage underwriting is the process a lender uses to determine whether a borrower will pay back the mortgage loan.

The loan officer gathers information from the borrower and then hands it off to the mortgage underwriter to analyze. Some of the information they use in the process are:

  • Credit history
    Your payment history will be closely reviewed to determine your credit worthiness.
  • Income
    The underwriter will want to be confident you can pay for the property.
  • Finances
    Other assets and investments come into play during the underwriting process.
  • The property’s cost
    The underwriter will order an appraisal to see how much the property’s worth for collateral purposes. They will also compare the cost to the mortgage amount you’ll need to purchase the property.

Mortgage Underwriting Steps

Mortgage underwriting typically follows a set path that leads them to their final decision.

  1. Fill out a mortgage application. This is where you share your financial information that will help you get approved.
  2. Verify income and assets. The underwriter typically asks for proof of income and will verify employment. They also verify your bank, stock and retirement accounts with the related institutions.
  3. Order an appraisal. Lenders want to make sure the property they’re financing is worth the price. They will order a property appraisal to meet this checkpoint.
  4. Run a title search. The lender does this to make sure nobody else has a claim on the property.

Once the lender receives these pieces of information, they use them to reach a final decision about your mortgage loan.

Types of Underwriting Decisions

The underwriter will make one of four decisions:

  • Approved
    This is what you want to hear! You’re clear to borrower your funds and can proceed to closing.
  • Denied
    For one reason or another, the underwriter has decided you are not a good candidate for the loan. Some of the common reasons underwriting denies borrowers are high debt loads, low income and low credit scores.
  • Suspended
    This decision means there’s some information missing that the underwriter requires to make a final decision. You’ll need to acquire this information before your underwriting process can move forward.
  • Conditional approval
    The underwriter can approve you “if” you meet their conditions. A condition could be anything from providing another pay stub to a divorce decree. Once you satisfy the condition, your loan moves to the approved stage.